Reformed Export System Starts This Week

Oct. 12, 2013 - 03:45AM
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Lockheed Martin's C-130J production line in Marietta, Ga. (Lockheed Martin)

WASHINGTON — Four years in the making, the Obama administration’s efforts to reform the export control system is getting its first shot at application, with the first two modified US Munitions List (USML) categories set to take effect Oct. 15, and a new enforcement and licensing mechanism in place.

Officials and experts expect the reforms — a broad plan to move more items out of the byzantine Foreign Military Sales (FMS) process and toward regulation by the Commerce Department on the Commerce Control List (CCL) — to provide increased overseas opportunities for US companies.

That surge may happen, but the government shutdown has delayed the processing of some licenses by the Commerce Department already. If the government isn’t back to work by Oct. 15, the delay will continue, even after the new rules become the law of the land.

The first two rewritten categories to take effect cover aircraft, aircraft parts and gas turbines. The new categories and the revision of the USML as a whole is built around the idea of a positive list that specifies items that should be more carefully controlled as opposed to a sweeping net to include all items associated with defense systems. The commencement date ends a 180-day transition period for companies and agencies to get ready for the new regime.

“This is a significant accomplishment for the administration, a multi-year effort taking on some of the most complicated technical issues there are,” said Andrew Shapiro, one of the architects of the plan while he was at the State Department who is now a managing partner at Beacon Global Strategies. “Prior administrations have tried and failed to bring about change.”

Officials had quietly voiced concern during the 2012 election cycle that the process would never be concluded had President Barack Obama lost. It’s unusual for a new administration from another party to pick up where its predecessor left off in a major policy change, meaning that several years effort would have likely gone to waste.

But with the re-election came an opportunity move reform along. Officials have been describing the changes as an opportunity to help defense contractors more easily sell more items that aren’t critical military technology overseas to help offset some of the expected domestic spending cuts. It won’t happen overnight, though.

“We’re not expecting on Tuesday to have this massive spike in exports,” said a senior White House official who spoke on the condition of anonymity ahead of the commencement date. “I think you’ll start seeing a building. It will build over time as people have transitioned to the new controls.”

Companies have been gearing up, a senior State Department official said, especially those with exposure to the parts market that may not have direct military application, but were previously caught up in the export control dragnet. For years, industry has lamented that even non-threatening items, such as simple bolts used in defense systems, had to undergo extensive review before sales overseas. Most military hardware will remain on the USML, but many more generic parts used for military systems, but also useful for commercial items, will transition to the CCL. There will also be some adjustments allowing parts to be sent to close allies for military hardware they already have.

“Companies have expressed to us that they’re excited about this change, and so they want to do it right, so they’re taking it cautiously,” the official said. “Some of the larger companies like Boeing have been focused on this and are really going to try to take as much advantage of this as possible, but it is going to be a while before we see a change.”

There’s a natural ramp up because everyone is figuring out the new system, the official said. “It’s a bit of a learning process for our folks too, but I think that the way that we’ve structured everything is once this gets going the exporters are really going to be able to take advantage of it in a big way.”

But beyond the educational part of the transition, there’s also the problem of the government shutdown.

The Commerce Department is essentially closed, and large swaths of the Defense Department’s export staff have been furloughed, with only the State Department largely operating. That has created a bit of a delay already for items destined for the CCL, as many license requests were expected before the application date and the agency was working to process them ahead of time to stay on top of things. Those requests still came in, but not as many have been processed because of the shutdown, and once Oct. 15 arrives, further delays could complicate things.

“Writ large, we’re not doing licensing,” the White House official said.

How long the shutdown lasts will dictate its impact, but Shapiro said the changes represent a long-term shift regardless of the short-term issues.

“We’re 10 days into it, and clearly it’s affecting services across the US government. However, this is a fundamental reorganization of the system,” he said. “The shutdown will end and these changes are going to last for years to come.”

Regardless, some bumps in the road are expected.

“I think it’s safe to say if the furlough hadn’t happened we would still have anticipated that there would be some glitches over the next several months as everybody gets used to this,” the State Department official said. “With the furlough, that’s probably going to compound the number of glitches that we run into because if somebody is not on the other end of the phone at commerce, or at DoD, whatever. Everybody is prepared to do their best.”

The shutdown is also affecting other areas of the export system. Foreign military sales have been facing inconsistent results depending on where potential deals are in the review process, since some offices have been open while others aren’t.

Now that more DoD civilians are returning to work that may help in one area, but State Department employees are themselves bracing for furlough notices if the shutdown continues. The impact of the FMS delays is unclear, although the fact that large deals typically take years to negotiate mean a several week delay is unlikely to have catastrophic consequences.

Besides revising the export items lists, the administration has also been busy improving enforcement and creating a common IT system to help with coordination. The system they will all use, originally belonging to DoD, is already in use at the State Department, with commerce initially expected to join the club this year. The shutdown, however, has likely pushed that back to early 2014. By having items on a common system, the hope is to help the agencies sort through requests quickly with less stove-piping of information.

One of the bigger goals behind the process has been the eventual creation of a single regulating agency, as things are currently split among a number of government departments. That would require further congressional approval, which might be difficult given the various fiefdoms that would need to turn over some power.

“Any kind of bureaucratic consolidation has to navigate the equities and jurisdictions of these multiple communities,” Shapiro said.

But if the first rules transition smoothly, it will help the case for a single agency, he said.

“If the transition goes well it will provide the ammunition for the administration that Congress should move forward.”

Other categories still need to be rewritten, including the incredibly complex electronics list, but if nothing else, the reform process has created a more unified export control community.

“The export control agencies are now working very well together,” the White House official said. “That was not the dynamic that we had earlier before we started this effort.”